Running a small business can be a great way to support yourself and your family, but it also comes with risks. Depending on the kind of business structure you utilized and how well you have separated your personal financial accounts from your business resources, there could be some risk to your most valuable assets when you decide to close the company.
Whether it no longer makes enough money to justify the investment of your time and energy or you want to retire, there could be negative financial consequences for you if the business has debts that you cannot fully repay when you dissolve the business.
A Chapter 7 bankruptcy for the company can protect the person who owns the business, and in some cases, they may find themselves facing personal bankruptcy instead.
Creditors and landlords could come after you personally
Depending on your financial habits and how you held the company, you could find yourself facing claims from those with executable contracts and debts owed by your business. A landlord could hold you responsible for the remainder of the lease at your current property, while other creditors may want you to personally pay business debts that the company does not have the resources to cover.
In extreme cases, even if you protected yourself by forming an LLC, creditors could go to court and ask the judge to hold you accountable. Misconduct and simple financial mistakes put you at risk of a judge holding you accountable for the financial obligations of a failed business that you own.
When the business discharges those debts in bankruptcy in its final weeks before you dissolve the company, you won’t have to worry about creditors coming after you over those debts later.
Chapter 7 bankruptcy is a powerful tool
Chapter 7 bankruptcy will result in the liquidation of your remaining company assets and the discharge of the unsecured debts owed by the business. While that means you won’t make money from what equipment your company still possesses as you’ll have to sell it off to repay creditors, it also means you don’t have any reason to worry about personal liability for debts owed by your company.
In scenarios where a business’s owner did not seek to protect themselves from a company’s debts, they may find themselves facing creditor claims directly. These individuals may also benefit from filing individual bankruptcy, although the chapter that they file may differ depending on their current financial circumstances.
Knowing the right time to file for Chapter 7 bankruptcy can help prevent prior financial issues from derailing your future.